Internal Control Processes Over Participant Contributions

Internal Control Processes Over Participant Contributions

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Are you doing all that you can to ensure that your participant’s accounts are correct?  When was the last time you evaluated your internal controls over participant accounts?  There are a few important steps you can do to beef up your internal control processes in order to increase the probability that your participant’s accounts are accurate.  Let’s take a closer look at the controls in place over the remittance of participant contributions to a third party administrator.

Controls over remittances can begin as early in the process as time keeping.  There should be a good process in place in order to ensure your employees are keeping accurate records of their time worked.  This in turn will make for accurate pay checks.  Managers should be reviewing and signing off on all employee time cards prior to entry into the payroll system.  Additionally, a separate person should be preparing the payroll utilizing these time cards.  After the payroll is prepared, another person should be reviewing for accuracy.  This segregation of duties is incredibly important to ensure no fraudulent or unwanted errors occur in the process of calculation of participant deferrals and employer matches.  Another key tool for reviewing payroll is obtaining and reviewing “change” reports.  These reports show all changes made to payroll records such as pay rates, addresses, etc.  Reviewing these will highlight items that need to be scrutinized for approval.

After the payroll has been processed accurately, the next area of control necessary to look at to ensure participant account accuracy is the uploading of the participant deferrals and matches to the third party administrator (“TPA”).  In order to assess what controls need to be put into place at this level, you must understand what the process for getting this information to the TPA really is.  Does the person in charge have to manually enter each contribution amount for each participant into the system, or is a spreadsheet uploaded with all of the data?  Obviously, if this is a manual process a bit more control should be placed in this area.  A great example of good controls would be to 1) tie out the overall total of contributions from a confirmation screen to the expected total per the payroll and 2) pick a certain sample size of participants each pay period (let’s say five) and tie their individual deferral amounts in to the amount uploaded.  If the confirmation that is obtained after upload does not give that much detail, usually you have read-only access to participant websites which have transaction details.  There you can review the date of the upload to ensure the proper amount per the payroll record was in fact deposited into the particular participant’s account.  Additionally, simply keeping a record of your review of the total and individual tie outs ensures that you have left a proper audit trail in case you are asked to prove you performed due diligence for any specific pay period.

Lastly, a general control can be performed at year end to ensure nothing was missed during each individual pay period tie out.  Take a year end payroll report and tie the participant contributions in to the total amount per the year end trust statement provided to you, the plan administrator, at the end of the year.  This tie out ensures that the TPA received all of the contributions which were withheld from participant accounts.

It is important to think through your processes frequently to ensure you are doing all that you can to protect the participant’s and your company from any issues that may arise with your 401(k) plan.  Additionally, documenting your procedures in case you have turn over within your 401(k) staff will significantly decrease your chance of mistakes being made.  For further information regarding your 401(k) plan, make sure to read more blog posts at The 411 on Employee Benefit Plans.

Shelby Williams